Starting July 15, parents will begin receiving monthly payments from the government just for having kids. The child tax credit is increasing from $2,000 per child under 17 to $3,000 for kids aged 6-17 and $3,600 for any kids under 6. These monthly payments are only going to be paid monthly for the last 6 months of the calendar year, then the rest of the tax credit will be received when you file your taxes next year. As of now, these monthly payments are not set to continue past 2021. But, rumor has it that the Biden Administration wants to have something similar to moving forward, (probably with some changes) but that is not guaranteed.
Note: You can go online and choose to defer the monthly payments and receive them as a tax credit when you file your taxes if you would prefer that.
If you choose to take these payments monthly, you will receive $250 a month for your children that are ages 6-17, and then $300 a month for those that are under 6. The other half of the payments will be given out as a lump sum when taxes are filed next year. It is important to note that these are tax credits, which means it reduces your tax bill on a dollar-for-dollar basis. These tax credits however are refundable meaning you can receive a refund on anything left over from the credit. Before, if you owed $3,000 on taxes and then received $4,000 from this tax credit, your tax bill would just be reduced to $0. But now, with the changes mane, you would actually be refunded $1,000 since they are fully refundable (meaning you can receive it even if you don’t owe the IRS any taxes).
So.. who qualifies to receive the full payments? The maximum modified adjusted gross income for a single filer to receive the tax credit and monthly payments is $75,000. For married couples filing jointly, it is $150,000. And for the head of household filers it is $112,500. It then begins to phase out if your income is above those amounts. Here is a calculator you can use to determine how much your family will receive.
Note: For families making less than $400,000 and other filers making less than $200,000 you will most likely receive the same tax credit as what it was previously ($2,000 per qualifying child).
Should You Take The Monthly Payment Or Opt-Out?
The IRS will pay out people based on last year’s tax return — so if you are going to make more this year, putting you over the income threshold, you would be taxed back by the IRS when you file. Note: there won’t be any penalty for accepting larger checks if you don’t end up notifying the IRS ahead of time. It is basically an interest-free loan that you will have to pay back.
Some people are choosing to opt-out to avoid an unexpected tax bill that could arise next year from receiving more of a credit than they were supposed to (because their income rose this year). So… be mindful that if you receive more than you are supposed to, you may have a tax bill you want to prepare for. Don’t neglect this step and end up with a tax bill you don’t have the funds to pay.
For those that qualify, you have to figure out what is best for you. Some are choosing to just receive the tax credit when they file their taxes, while others are choosing to have the money added monthly to help their financial plan. However, you should remember that these payments are set to stop in January, so be ready to adjust to having fewer monthly dollars in your budget.
Other Tax Breaks To Take Advantage Of With Kids
For 2021, there is also a child and dependent care credit that you can use for child care costs for children under 13. You can get a tax credit for up to 50% of child care costs up to $8,000. This number goes up to $16,000 if you have 2 or more dependents. Note: The percentage phases out for high-income earners. Also, this year there was a change where the credit is now refundable, meaning you can receive a refund on anything left over from the credit. Before it only could reduce your tax bill to zero, not result in a refund.
I just wanted to add this in there so people can be mindful of it. That is a pretty significant tax credit to take advantage of. Many people who do their own taxes miss some of these benefits in the tax laws, this is why it can be helpful to work with a financial advisor who can help make you aware of these benefits.
If you are looking for an advisor who can help, you can book a meeting with me here.
Differences Between 2021 Child Tax Credit and Pre
- A big credit increase – it was $2,000 a month for children under 16. Now it is $3,600 for children under 6 and $3,000 for those aged 6-17. (Also, it now includes children aged 17).
- Before it included incomes under $400,000 for married filing jointly and $200,000 for individuals — now it starts to phase out for married filing jointly at $150,000 and for those filing as a head of household at $112,500. As you can see, the income qualifications decreased by quite a bit.
- Only $1,400 of the credit was refundable before, now the entire amount of the credit is refundable.
Important Parts To Summarize
- You can either claim the entire credit on your tax return or you can receive the monthly payments for the second half of the year and receive the other half when you file your taxes.
- The tax credit is $3,000 for children 6 to 17 and then $3,600 for children under 6
- Income begins to phase out for head of households at $112,500 and $150,000 for married filing jointly. It is based on last year’s tax return.
- The monthly payments come on the 15th of every month, unless that’s a weekend or holiday.
- You can opt-out of the monthly payments here
- If you are overpaid from the child tax credit, you will need to pay that back on next year’s tax return. So make sure you are prepared for that.
As you can see there are a lot of details to know about the new child tax credits, but I want you to understand what they are and what you will receive so you can plan ahead. The goal is always to maximize the tax benefits the government offers, having an advisor can help you do so.
Next week we will get into some ideas of how to best use this tax credit to your benefit!
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.